Important Point
An agreement is “discovered to be void” where it is caused by mutual mistake as to material fact irrespective of the fact that mistake rendered it void from inception, though discovered to be so at a much later stage.

Headnote:(i) Contract Act, 1872-Section 20-Agreement based on Mistake-Agreement for sale of agricultural land-Mutual Mistake of fact as to area of land as also the price whether it was to be paid @ per “bigha” or per “kanal”-Lower appellate Court as well High Court found agreement was caused by Mutual mistake as to fact essential to agreement and was void u/s 20-Whether correct? (Yes).
       Held : “Bighas” and “Kanal” are different units of measurement. In the Northern part of the country, the land is measured in some States either in terms of “bighas” or in terms of “kanals”. Both convey different impressions regarding area of the land. The finding of the Lower Appellate Court is to the effect that the parties were not ad-idem with respect to the unit of measurement. While the defendant intended to sell it in terms of “kanals”, the plaintiff intended to purchase it in terms of “bighas”. Therefore, the dispute was not with regard to the unit of measurement only. Since these units relate to the area of the land, it was really a dispute with regard to the area of the land which was the subject matter of agreement for sale, or, to put it differently, how much area of the land was agreed to be sold, was in dispute between the parties and it was with regard to the area of the land that the parties were suffering from a mutual mistake. The area of the land was as much essential to the agreement as the price which, incidentally, was to be calculated on the basis of the area. The contention of the learned counsel that the “mistake” with which the parties were suffering, did not relate to a matter essential to the agreement cannot be accepted. (Para 23)
       (ii) Contract Act, 1872-Sections 20 and 74-Agreement based on Mistake having forfeiture clause-Agreement for sale of agricultural land-Found void due to mutual mistake-Agreement containing forfeiture of earnest money clause-Whether also void? (Yes).
       Held : (Section 74) contemplates a valid and binding agreement between the parties. Since the stipulation for forfeiture of the earnest money is part of the contract, it is necessary for the enforcement of that stipulation, that the contract between the parties is valid. If the forfeiture clause is contained in an agreement which is void on account of the fact that the parties were not ad-idem and were suffering from mistake of fact in respect of a matter which was essential to the contract, it cannot be enforced as the agreement itself is void under Section 20 of the Contract Act. A void agreement cannot be split up. None of the parties to the agreement can be permitted to seek enforcement of a party only of the contract through a court of law. If the agreement is void, all its terms are void and none of the terms, except in certain known exceptions, specially where the clause is treated to constitute a separate an independent agreement, severable from the main agreement, can be enforced separately and independent. (Para 27)
       (iii) Contract Act, 1872-Sections 13, 14, 20 and 65-Back of free consent due to Mistake and Refund-Agreement to sell agricultural land-Earnest money paid-Agreement found to be void due to mistake-Lower appellate Court ordering seller to refund the earnest money to purchaser u/s 65-Whether correct? (Yes)-Effect-SLP against dismissed.
       Held : Mutual consent, which should also be a free consent as defined in Section 13 and 14 of the Act, is the sine qua non of a valid agreement. One of the essential elements which go to constitute a free consent is that a thing is understood in the same sense by a party as is understood by the other party. It may often be that the parties may realise, after having entered into the agreement or after having signed the contract, that one of the matters which was essential to the agreement, was not understood by them in the same sense and that both of them were carrying totally different impressions of that matter at the time of entering into the agreement or executing the document. Such realisation would have the effect of invalidating the agreement under Section 20 of the Act. On such realisation, it can be legitimately said that the agreement was “discovered to be void”. The words “discovered to be void”, therefore, comprehend a situation in which the parties were suffering from a mistake of fact from that very beginning but had not realised, at the time of entering into the agreement or signing of the document, that they were suffering from any such mistake and had, therefore, acted bona fide on such agreement. The agreement in such a case would be void from its inception, though discovered to be so at a much later stage (Para 32)
       Further held : We may point out that there are many facets of this question, as for example (and there are many more examples), the agreement being void for any of the reasons set out in Sections 23 and 24, in which case even the refund of the amount already paid under that agreement may not be ordered. But, as pointed out above, we are dealing only with a matter in which one party had received an advantage under an agreement which was “discovered to be void” on account of Section 20 of the Act. It is to this limited extent that we say that, on the principle contained in Section 65 of the Act, the petitioner having received Rs. 77,000/- as earnest money from the respondent in pursuance of that agreement, is bound to refund the said amount to the respondent. A decree for refund of this amount was, therefore, rightly passed by the Lower Appellate Court. (Para 36)
       Consequently held : For the reasons stated above, we see no force in this Special Leave Petition which is dismissed. (Para 37)

Judgement Key Points

Key Points: - The agreement for sale of agricultural land was found void from inception due to mutual mistake as to area and price (Section 20) (!) (!) - Forfeiture of earnest money cannot be enforced where the contract is void; refund of Rs. 77,000 ordered under Section 65 for restoration of advantage gained under a void contract (!) (!) (!) - Section 65 obliges restoration or compensation to the person from whom advantage was received when an agreement is discovered to be void or a contract becomes void (!) (!) - The unit discrepancy between "bighas" and "kanal" established that the dispute involved essential terms (area and price) rather than incidental measurement, reinforcing voidness under Section 20 (!) - The lower courts correctly held that specific performance decree could not be granted and rightly granted refund of earnest money due to mutual mistake (!) (!) (!) - The decision discusses the distinction between an agreement discovered to be void and a contract that becomes void, and its impact on remedies under Sections 65, 73, and 74 (!) (!) (!)

What is the effect of mutual mistake of fact as to area and price on the validity of a sales contract under Contract Act Sections 20 and 74?

What is the remedy regarding earnest money when the contract is found void from inception due to mutual mistake under Section 65?

What is the significance of "discovered to be void" in relation to restitution of benefits received under a void contract?

Judgment

S. Saghir Ahmad, J.-Delay condoned.

2. The defendant is the petitioner in this Special Leave Petition before us.

3. The petitioner, who owned 48 kanals 11 marlas of agricultural land in village Panjetha, Tehsil and District Patiala, entered into a contract for sale of that land with the respondent on 20.5.1988 @ Rs. 24,000/- per acre. At the time of the execution of the agreement, an amount of Rs. 77,000/- was paid to the petitioner as earnest money. Since the petitioner did not execute the sale deed in favour of the respondent in terms of the agreement although the respondent was ready and willing to perform his part of the contract, the latter, namely, the respondent filed the suit for Specific Performance against the petitioner which was decreed by the trial Court. The decree was modified in appeal by the Additional District Judge who was of the opinion that the parties to the agreement, namely, the petitioner and respondent both suffered from a mistake of fact as to the area of the land which was proposed to be sold as also the price (sale-consideration) whether it was to be paid at the rate of per “Bigha” or per “Kanal”. The Lower Appellate Court also found that the respondent was not ready and willing to perform his part of the contract. Consequently, the decree for Specific Performance was not passed but a decree for refund of the earnest money of Rs. 77,000/- was passed against the petitioner. This was upheld by the High Court.

4. Learned counsel for the petitioner has contended that since the Lower Appellate Court has recorded a finding that the respondent was not ready and willing to perform his part of the contract inasmuch as the balance of the sale consideration was not offered by him to the petitioner, the Lower Appellate Court as also the High Court, which upheld the judgment of the Lower Appellate Court, were in error in passing a decree for return of the amount of earnest money particularly as the parties had expressly stipulated in the agreement for sale that if the sale deed was not obtained by the respondent on payment of the balance amount of sale consideration, the amount of earnest money, advanced by the respondent, shall stand forfeited.

4. In order to decide this question, we have to proceed on certain admitted facts which are to the effect that there was an agreement for sale between the parties concerning agricultural land measuring 48 kanals 11 marlas which was proposed to be sold at the rate of Rs. 24,000/- per bigha or kanal and that on amount of Rs. 77,000/- was paid as earnest money. The sale deed was to be obtained on or before 15.10.1988 by offering the balance of the sale consideration to the petitioner before the Sub-Registrar, Patiala. There was a stipulation in the agreement that if the respondent failed to pay the balance amount of sale consideration, the earnest money shall stand forfeited.

5. During the pendency of the appeal before the Additional District Judge, respondent made certain amendments in the plaint which have been set out in the judgment of the Lower Appellate Court as under:-

“(a) He corrected the area of the suit land as 48 bighas 11 biswas, instead of 48 kanals 11 biswas.

(b) In para 3 of the plaint, he corrected the figure of Rs. 1,56,150/- to Rs. 2,35,750/-.

“The land is mortgaged with Canara Bank by the defendant for Rs. 20,000/-. The defendant be directed to deposit the due amount to the Canara Bank or the plaintiff be authorised to retain the mortgage money.”

(d) He also added the following lines to para 9 of the plaint:-

“The plaintiff met Tarsem Singh in the month of September, 1988 and offered him the money with request to get the sale deed registered in his favour but he refused to do so.”

(e) He also added the following lines to para 19 of the plaint:-

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1998 Supreme(SC) 142

Important PointAn agreement is “discovered to be void” where it is caused by mutual mistake as to material fact irrespective of the fact that mistake rendered it void from inception, though discovered to be so at a much later stage.

What is the effect of mutual mistake of fact as to area and price on the validity of a sales contract under Contract Act Sections 20 and 74?

What is the remedy regarding earnest money when the contract is found void from inception due to mutual mistake under Section 65?

What is the significance of "discovered to be void" in relation to restitution of benefits received under a void contract?

Cases Referred (1)

Important Point
An agreement is “discovered to be void” where it is caused by mutual mistake as to material fact irrespective of the fact that mistake rendered it void from inception, though discovered to be so at a much later stage.